Full Year Results in the year ending 31st December 2013 stated revenues of £51.06 million but given the nature of high cost operations, they booked a loss after tax of £2.02 million. Still the company managed to reduce loans and borrowings in the year to £1.98 million (down from £2.39 million YE2012). The cash and cash equivalents stood at £1.32 million.
So a low margin, loss making outfit. Ignore it you might say. Well, if you read between the lines the company has been proactive in tackling the weaker outfits in its business group.
The reason for the loss as stated - "the Group recorded a higher loss after tax in 2013 mainly as a result of
1) a write down in value of certain assets
2) losses incurred in the Group's overseas operations in Cambodia, Indonesia and the Philippines
Write-downs are a standard accounting 'trick'. They can mask company profitability assuming they are not recurring. In MBO's case the non-cash loss on assets to offset net profits reduces tax obligations. More on the disposal of assets later. The second point is significant as the company note
- "In view of the continued losses from the operations in Cambodia and Indonesia ... the Company discontinued these operations in March 2014 in order to mitigate further losses in the future from these operations and to generate cost savings for the Group."
So at the end of the first half (HY14) they had disposed of Cambodia and Indonesia operations. This was set to impact second half figures, with reduced revenue for the group but crucially improved margins and cash growth.
Skip forward to August 2014, MBO released an update announcing the purchase of real estate in Kuala Lumpur, Malaysia - their original base of operations. The cost of the office space was a cool £333,550 payment and funded through cash in the bank. The company were intending to refinance the property by effectively remortgaging the majority of equity in it for c£300,000 in order to free up some additional cash.
The market has overlooked this development. Considering MBO were renting previously, they have taken the leap in securing an asset with existing cash which may appreciate in value over time. At the very least, high rental costs have been stripped and will be a forward saving. The loan was expected to be completed by September and the company intend to operate from their new office in early 2015. They will still rent one of the two existing office premises in Kuala Lumpur. The company have assessed their growth market (Malaysia) and are utilising free cash to secure permanent residence (assets) in order to reduce expenses and increase company stability.
Half Year results for 2014 were in line with expectations. Revenues of £23.5 million generated a loss after tax of £30k. To put this into perspective the loss listed in H113 was £120k. An improvement on the same time last year, but still loss making...
However these results include trading figures for Cambodia and Indonesia for the first 3 months which were loss making and as a result MBO expect
- "an improved trading performance in the second half of 2014"The company also took a non cash write-down (impairment) on disposal of the Indonesian operations in March 2014. If you look at the figures at face value there's not much to get excited about. However MBO made closer to £180k profit in the first half, and here's why...
- "The disposal of the subsidiary in Indonesia in March 2014 had resulted the impairment loss on the amount due to the holding company of £0.56 million. However, the amount is partially mitigated by the gain on disposal of the subsidiary of £0.35 million."In simple English they booked a £560k NON-CASH impairment, partially offset by a non-cash balance gain on the disposal of a subsidiary for £350k. The difference of £210k is a non cash impairment, effectively a one off write-down included as a loss masking company profitability in order to reduce tax obligations. The impairments were part of the re-organisation away from riskier growth markets and focusing more towards Malaysian demand.
MBO recorded a loss of £30k in the period, so the difference is approximately £180k gain (cash or equivalent). The cash profit of £180k in the first half is impressive as Indonesia and Cambodia were loss making during the first three month. Focus on the cash and cash equivalents and this confirms the picture more or less. Cash increased to £1.46 million (£140k increase in 6 months) aided by the effect of foreign exchange rate changes, whilst loans and borrowings of £1.89 million reduced by £90k. That's a £230k reduction in net debt during the interim period! This whilst the Cambodian and Indonesian operations where loss making. So what is recorded as a loss on the balance sheet isn't always reflective of the full picture.
The second half performance is expected to yield better results. The purchase of the property will see intangible assets up by £300k and assuming the loan has been processed then this will push up the borrowing total. It's impossible to say if any of the net cash profit will be used to repay existing loans or rather be kept as cash in the bank but we can say with some confidence the net debt position of £430k will have improved in the final six months of 2014.
MBO will likely reduce the net debt position although much will depend on whether they have refinanced the recently purchased property. What is clear is the balance sheet is healthier than six months earlier and the continuing trend of growth through stream-lining operations and generating cash will be recognised at some point by the markets
Current market capitalisation of £2.5 million seems very cheap considering the growth potential in this part of the world. Anyone unsure of Malaysian economic activity should note the country relies to an extent on its domestic oil production and lower revenues may impact growth prospects in 2015. However the price of Brent Oil appears to have bottomed now, trading 20% higher since mid January.
The market has yet to factor in improvements made to the balance sheet since the disposals of certain loss making assets and I'm confident the trading update in March 2015 will spark some interest.